What is a Candlestick Pattern?

[Brian Hayslip]

[Sheila Olson]

A Candlestick Pattern is when one or more Candlesticks align in a specific way to illustrate a particular kind of price action. As a result Candlestick patterns are seen as useful tools for trading the markets, or at least understanding them better. Candlestick Patterns are many and varied. While there is a whole glossary available, getting a firm understanding of what each pattern is telling you will take your understanding of price action to a more granular level. This prioritizes being able to understand what price action is trying to tell you over being able to identify a particular pattern. The Rising Window pattern represents two time intervals of positive price action. In both candlesticks the closing price is close to the high of the day and also above than the opening price. It’s commonly held to be more significant that the low of the second candlestick is above the high of the preceding candlestick. This creates a GAP which according to Technical Analysis would act as a Support level against selling pressure. The Falling Window Candlestick Pattern applies the same principles but to a falling market. A Bearish Harami is a two candlestick pattern; if preceded by upwards market momentum it is considered to be a signal of bearish activity. The small red candlestick in time period 2 is entirely contained within the body of the green candle of time period 1. After researching Candlestick Patterns in more detail you may adopt the strict definition that Candlestick 2 most be less than 25% of the size of Candlestick 1.

Time Periods

An important aspect of Candlestick Patterns is learning how to appreciate the importance of the Candlestick’s time period in relation to your trading decisions. Setting time intervals to different levels presents the same data in a different way and you need to choose a Candlestick time frame that matches your investment time horizon. Put another way, a signal from a 1 minute candle is likely to offer little effective guidance for a trade you are looking to put on and hold for several days.

Pros

• Candlestick Patterns are a mine of information.
• Simple in design they can quickly convey a lot of information about the markets.
• Signal strength can be graded with some patterns being seen as stronger signals than others.
• Candlestick Patterns can be used across all instruments and markets.
• They are easy to use in conjunction with other diagnostic tools and market data such as traded volumes

Cons

• You might consider Candlestick Patterns useful, but on their own not quite strong enough signals for you to commit capital to a trade.
• All patterns need to be considered in a wider time context. For example, the Bearish Harami pattern is considered to be a medium strength signal that only works following an upwards trend. Basing trades off this pattern in a sideways market being strongly discouraged.
• Changing the time intervals of your candles can also aid your analysis. If you are analyzing a 15 minute Candlestick, then breaking it down into three Candlesticks of 5 minutes each might offer support (or otherwise) to your trading strategy.